With news that China is en route to launching what is viewed as a proper junk-bond market, SMEs are poised to have access to a funding source that has largely been reserved for the largest corporate names and state-owned enterprises (SOEs) – contingent on regulators’ ability make it broad enough to accommodate both investors and the SMEs that need it.
Establishing a deep bond market will definitively be hard work but this solution much more constructive than alternatives.
But the question is, ‘when?’ Initial reports on the junk-bond market suggested that the market might launch as early as next month, but Asiamoney PLUS sources with knowledge of regulatory process say the market would unlikely be up and running until later this year at the earliest, considering the changes to the political landscape that will take place in 2012.
Until issuers are able to come to market, SMEs will continue tapping unofficial lending avenues for cash. It’s unclear precisely how much is traded in this private lending sector, but the People's Bank of China estimated in December that the of the market is more than 20% of the country’s total lending. To stymie the industry’s growth, the State Council has looked into a series of measures. As Asiamoney reported in November, these include lifting taxes that strain SMEs’ liquidity, encouraging banks to boost lending to SMEs, and cracking down on illegal practices such as pyramid schemes and lending at excessive rates (it is said that some of these illegal lenders charge as much as 60% annualised rates).
Yet, many aspects of shadow banking still remain problematic to regulators. While the government’s measures are certainly steps in the right direction, it’s unknown whether these measures themselves would free up enough liquidity to keep enough SMEs out of the underground borrowing world, especially when banks continue to display an aversion to fluid lending to these companies.
This causes the problem to mount, and has real-life repercussions. Caixing Online reported last week that the city of Wenzhou has become a “hotbed of loan sharking” and gained notoriety over the summer after dozens of its local chief executive officers fled the country to avoid repaying high-interest underground loans. At the time, the central bank reported private lending in Wenzhou amounted to Rmb110 billion (US$17.5 billion), and involved 89% of the city’s local families and 60% of its companies.
On a broader plane, it’s important to keep in mind that SMEs employ a huge part of China’s population and is a prominent driver of the country’s growth. According to the Ministry of Commerce, more than 50 million SMEs account for approximately 80% of newly created jobs in China. Denying this vein of company a credible outlet to access the cash necessary to grow, innovate and compete is detrimental, and jeopardises their ability to hire.
However, merely launching a junk-bond market won’t be enough to dispel China’s shadow banking problems – it has to be deep enough to accommodate issuers and it needs to be highly regulated to foster investors’ trust. The China Securities Regulatory Commission (CSRC), the body that will oversee the market, needs to dedicate the proper resources to create a functioning system to assure investors that bond issuers will be accountable and every issuer that comes to market has withstood the proper due diligence.
Chinese regulators haven’t been especially snappy getting other areas of its financial services sector up to speed, nor making these industries available to a broader public (if history is anything to go by, we can expect a pilot-version of the bond market to launch, and only be available to a limited number of issuers and investors at its onset).
This won’t do for the junk bond market if regulators hope to minimise underground lending anytime soon. Establishing the market will take manpower and the dedication to see the market through its growing pains, but the outcome may be something that regulators, as well as SMEs, investors and the country’s citizens, can be pleased with if it the job is done right.